Can I Get a Loan Modification If I Have Equity?

The federal government began working with lenders around the United States in 2009 to develop loan modification programs for homeowners facing difficulty with managing their monthly payments. Additionally, some lenders offer in-house modification plans to borrowers that have different guidelines than the federal programs. Loan modifications provide a good option if your mortgage debt exceeds your property value. However, in many instances, you can modify your loan even if you have equity in your home.

Home Affordable Modification Program

The federal government's Home Affordable Modification Program aims to help homeowners who are facing foreclosure due to falling behind on their loan payments. You can qualify for HAMP if you have a mortgage on your primary residence that predates January 2009. Under HAMP, your lender can reduce your interest payment as low as 2 percent or increase your mortgage term to 40 years to reduce your monthly expense. The HAMP guidelines include no stipulations that limit the modifications to homeowners based on their equity.

Freddie Mac

As of 2009, Freddie Mac, a government-sponsored mortgage company, owned 5.3 million delinquent mortgages that were originated in the United States. In the same year, the firm began offering loan modifications to homeowners as part of its Relief Refinance Mortgage program. Under the scheme, the company agreed to modify loans for homeowners who were experiencing financial hardship but were current on their mortgage payments. Freddie Mac enables homeowners with equity and those without equity in their homes to participate in the plan.

Home Equity Loans

Home equity loans are a type of mortgage instrument that can occupy the first or second lien position on your home. Lenders hold home equity loans and do not sell the loans to entities such as Freddie Mac. When interest rates fall, some lenders enable homeowners to modify existing loans in order to lower interest rates or increase loan balances. Laws in many states, including Texas, enable lenders to modify the terms of a home equity loan even if the modification occurs within 12 months of the loan being established. You can normally modify your loan regardless of the equity you have in the home.

Considerations

In theory, your mortgage lender or the company holding your mortgage can agree to modify your loan with minimal restrictions. However, modifications are designed to lower monthly payments or reduce interest due on the loan. Consequently, lenders lose money when modifications take effect. If you do not have a loan that qualifies for a federal modification plan, your lender may refuse to modify your loan and foreclose on the loan if you fail to make the payments as originally agreed. If you have equity in your home, the lender can sell the home at auction and raise sufficient funds to cover the debt. Lenders usually only agree to modifications that are required by the government or modifications that benefit both you and the lender.

References

• Freddie Mac Announces Two Initiatives Supporting President Obama's Making Home Affordable Plan; March 2009
• Office of Consumer Credit Commissioner: Home Equity Modification Interpretation Letter; Randall S. James, et al.; December 2001
• "Forbes"; Loan Modification Plan Gets Sweeter; Maurna Desmond; March 2009
• Home Affordable Modification Program
• Frequently Asked Questions About Freddie Mac

Resources

• "The Wall Street Journal"; Loan-Modification Plan Revised ...; April Simon; April 2009